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Biotech Regain Health: ETFs to Prescribe

There couldn't have been a better a time for healthcare recovery. Just the day before World Health Day on April 7, the ailing healthcare sector got regained its health, driving the broader market. The recovery was greater for the biotechnology corner of the healthcare industry.

Investors should note that biotech was a great performer from late 2011 to early 2015. However, as soon as risk-off sentiments took the global market in its grip in mid 2015 following Chinese growth worries, this high-beta zone succumbed to a correction.

Since then, the otherwise piping hot space was seesawing between pains and gains. The beginning of 2016 did not help the sector too with risk-off trading pulling strings. However, the start of Q2 was grand for the sector as biotech saw the best day in seven years on April 6, when Nasdaq Biotechnology index added 5.95%.

What Caused the Rally?

No points for guessing what led to the stupendous rally in the space. It was indeed the dovish Fed minutes. With a cautious rate hike stance to be adopted by the Fed and a cheap dollar, investors turned to high-flying sectors like technology, biotech and consumer discretionary in order to reap as much capital appreciation as they can.

Minus some temporary glitches and rough trading in between, encouraging industry trends, increasing merger and acquisition activities, several important product approvals and label expansions, ever-increasing health care spending and an aging population led the sector to regain its lost ground on April 6.

Compelling Valuation

A strong rebound was long overdue. After all, the largest biotech ETF iShares Nasdaq Biotechnology (IBB) has tumbled over 15.5% so far this year (as of April 6, 2016) and lost 18.8% in the last one year. Despite hailing from a high-growth sector, IBB now trades at a P/E (ttm) of 18 times, the same as SPDR S&P 500 ETF (SPY) (read: Biotech ETFs Hit 52-Week Lows: Time to Buy?).

Moreover, the broader medical sector has a current-year P/E of 15.4 times, reflecting an 11.5% discount to the S&P while its next-year P/E stands at 13.8 times, a 10.4% discount to the S&P 500. Shares of the sector have tumbled 11.4% so far this year (as of March 29, 2016) (read: 4 Sector ETFs at a Bargain).

How to Play?

Investors looking to gain exposure to this uptrend may want to take a look at the following ETFs, as these offer concentrated exposure to biotechnology companies. The biotech ETFs mentioned below could be worthwhile investments in the near term, especially as long as the Fed-driven solace prevails in the market.

SBIO tracks the Poliwogg Medical Breakthroughs Index. The index screens the U.S. listed biotech or pharma companies with one or more drugs in Phase II or Phase III FDA clinical trials.
It is a small cap centric fund, having amassed $99.2 million in its asset base. No stock accounts for more than 4.5% of the portfolio. The product charges 50 bps in fees per year from investors. It gained about 7.1% on April 6 but has shed about 22.2% in the year-to-date timeframe (as of April 6, 2016).

With AUM of $1.93 billion, XBI provides equal weight exposure to 90 stocks. This suggests that the product has no concentration issue and offers huge diversification benefits. The product has a definite tilt toward small cap securities. It charges a relatively low fee of 35 bps a year for the exposure. The ETF added 7.3% on April 6 and is down about 18% so far this year (as of April 6, 2016). The fund has a Zacks ETF Rank #3 (Hold) (see: all the Health Care ETFs here).

FBT tracks the NYSE Arca Biotechnology Index. The 30-stock fund has amassed about $870.3 million in assets and charges 58 bps in fees. The top three holdings of the fund are Intercept Pharma, Juno Therapeutics and Medivation. The fund was up 5.92% on April 6 but is down 14.9% so far this year (as of April 6, 2016). The fund has a Zacks ETF Rank #2 (Buy).

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